Amazon Rises After Sales, North American Margins Improve

An employee loads a truck with boxes to be shipped at the Amazon.com Inc. distribution center in Phoenix. Photographer: David Paul Morris/Bloomberg

Jan. 30 (Bloomberg) -- Amazon.com Inc., the world’s largest
Internet retailer, surged after reporting gains in sales and
North American operating margin as it benefited from investments
in warehouses and a jump in holiday shopping.

Fourth-quarter sales climbed 22 percent to $21.3 billion,
the Seattle-based company said yesterday in a statement.
Analysts on average had projected $22.2 billion, according to
data compiled by Bloomberg. Operating margin in North America
widened to 5 percent from 2.9 percent a year earlier. Shares
rose as much as 12 percent in extended trading.

Chief Executive Officer Jeff Bezos is pumping money into
new warehouses, seeking to draw consumers away from malls with
Amazon’s two-day delivery and massive selection. The company
added 20 shipment hubs last year alone. The wider margins show
that investment is starting to pay off, and is helping Amazon
grab a bigger share of the record $42.3 billion in online
holiday spending, according to ComScore Inc.

“If you break apart their businesses, the U.S. is more
mature than some of their international markets, where they’re
in the very early stages,” said Tom Forte, an analyst at Telsey
Advisory Group. “I wouldn’t be surprised if investors are
looking at that performance -- operating margin in North America
-- as a sign that, despite the continued rate of investment by
the company, there’s an opportunity for margin expansion.”

Margin Growth

Amazon shares climbed 4.8 percent to $272.76 at the close
in New York, the biggest gain since Oct. 26. The stock jumped 45
percent in 2012.

The operating margin growth in North America was driven in
part by an increase in sales on its website by third parties,
which made up 39 percent of units purchased in the fourth
quarter, compared with 36 percent a year earlier, Amazon Chief
Financial Officer Tom Szkutak said on a conference call
yesterday. Those purchases boost margins because Amazon collects
a commission on any item sold by an outside vendor and books
that income as 100 percent profit.

Fourth-quarter operating income rose to $405 million, the
company said, compared with an average estimate of $212.1
million. Net income fell to $97 million, or 21 cents a share,
from $177 million, or 38 cents, a year earlier, Amazon said.

Fulfillment Spending

Spending on fulfillment jumped 36 percent to $2.26 billion,
making up the largest percentage of Amazon’s costs, the company
said. Worldwide operating margin in the quarter was 1.9 percent,
the sixth straight period of margins narrower than 2 percent.
Operating margin, a measure of profitability, reflects operating
income as a percentage of net sales.

The warehouse expansion, while expensive, is helping to
bring down transportation costs, Szkutak said. Shipping costs
totaled 4.5 percent of worldwide sales, compared with 5.4
percent a year earlier.

First-quarter operating income will range from a loss of
$285 million to profit of $65 million, Amazon said. Sales will
rise to $15 billion to $16.6 billion, compared with an average
analyst estimate of $16.8 billion.

Amazon is the only company “that is able to leverage a
global fulfillment network to drive disruption of traditional
offline retail sales,” Scott Devitt, an analyst at Morgan
Stanley, wrote in a note to clients. “The market is
underestimating the long-term international sales opportunity
and the cost leverage that will occur as fulfillment investments
drive lower unit-variable shipping costs.”

E-Commerce Surge

The spending on fulfillment may help Amazon gain share in a
worldwide e-commerce market that Devitt estimated will reach $1
trillion by 2016, up from $512 billion last year. By then,
Amazon’s share will be 23.5 percent, pushing the company’s total
sales to $166 billion, he projected in a Jan. 6 note.

Strengthening its shipping network helps Amazon improve
service for Prime customers, who pay $79 a year for access to
two-day shipping and a selection of video content at no extra
cost. That group is getting larger and tends to make more
purchases on Amazon than regular users, Szkutak said.

“Prime customers who are watching free content through
Prime Instant Video has gone up dramatically year over year,”
he said. “They’re also purchasing paid content. They watch free
but they’re also paying for new content.”

The Kindle Fire HD tablet computer was Amazon’s most
popular item in 2012, the company said, with its line of Kindle
tablets and e-book readers holding the top four spots on
Amazon’s worldwide best-seller list at year-end. In 2012, Amazon
also opened Kindle Stores for Brazil, Canada, China and Japan to
sell popular books, including titles in the local languages.

Bezos has said the company sells its Kindle Fire near the
cost of production, aiming to make money from purchases of
digital media on the device.